Question

(a) Explain the differences in implications for accounting when leave is said to be vesting as against non vesting.

(b)Are there any differences in the effects of a defined benefit superannuation scheme from a defined contribution superannuation scheme for a firm and its accounts?Explain

Answer 1

1) If sick leave is non-vesting, the employee has no entitlement to a cash settlement of unused leave. The employer recognizes a liability for accumulating sick leave, measured as the undiscounted amount expected to be paid. The entity will have good reason to expect that all vested accumulating sick leave will be paid.

2) Benefit superannuation scheme -

In the defined benefit plan, you already know the pension amount of retirement benefits. And calculating the pension amount after taking into consideration your salary history and number of years in service.

In a defined benefit plan, you are assured of the pension amount irrespective of the returns generated by the pension fund. So that you can budget accordingly. In India, public sector bank pensions and central civil service pensions are examples of defined benefit pension schemes. As the pension amount is known in pre-defined pension benefits, it allows you to chalk out your finances and plan goals accordingly.

Contribution superannuation scheme

Unlike a defined benefit plan, in a defined contribution plan, the pension amount is not known in advance. Here, the pension amount depends on the returns received through your investment as well as your contribution. A certain amount of money is contributed by you and your employer over a certain period of time, which is invested in money at varying degrees of risk, including equity, and debt.

In this scheme, there is freedom to decide about asset allocation. You can opt for equity. On the other hand, if market fluctuations scare you, then you can opt for debt funds. And you can also opt for a mix of equity and debt to get the best of both worlds.

The National Pension System is an example of a defined contribution scheme. It offers two options for investing - active options and lifestyle funds. One of the biggest benefits of a defined contribution plan is that it allows you to be aggressive and receive higher pension amounts and to combat the effects of inflation in the process.